Financial ratios for analysis

Monkeys - was asked by a friend to come up with a list of 10 (or so) of the "go-to", primary financial ratios, metrics, etc that would be used for financial analysis.

Anyone have thoughts here? If you could only look at a few metrics to get a feel for a companies performance, what would they be?

Comments (35)

9y 
BepBep12, what's your opinion? Comment below:

Revenue Growth + ROIC

'Before you enter... be willing to pay the price'
9y 
CountryUnderdog, what's your opinion? Comment below:

EBITDA multiples

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9y 
Bobby Digital, what's your opinion? Comment below:
peinvestor2012:
That is way too broad OP. Not only does it vary by industry (i.e. banking vs. industrials), but also by what you are using the analysis for (i.e. M&A vs. equity valuation)

I realize it is broad but that is how the question was posed to me. It wouldn't necessarily be for any one specific industry or purpose (eg M&A). In the most general sense, if you asked someone "Hey, give me your 10 'go-to' metrics" -- what would they say?

Best Response
9y 
oreos, what's your opinion? Comment below:
peinvestor2012:
Fair enough.

Gross Margin, EBITDA Margin, EBITDA Multiples, P/FCF, Debt/Equity (or Debt/Total Capital), ROA, ROIC, EBIT/Interest.

These are pretty weak. I mean EBIT / Interest? Rubbish. Why not supplant for FCFF / Interest which begs the question why do you only care about interest? wana pay down any debt? so lets try FCFF / Debt service + swap payments (since swaps are pari to snr debt).

Why are you doubling up on margins? you either want EBITDA or NI margins if you're Equity or Debt, respectively. Gross means shit if the accountants are gunna fiddle it (far easier than EBITDA and NI). At least from EBITDA you could use the FCFF conversion to get something meaningful. D/E, why? Totally industry unspecific and cash flow unspecific.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
  • 3
9y 
James07, what's your opinion? Comment below:

It depends, with comps typically you show multiples based on LTM and forward multiples - but when you apply it to the target Co. to get a valuation - just be consistent... with regards to DCF with FCF negative firms, you can project out to the year when it has positive FCF or just use exit multiple method, where all of your value comes from the terminal period...

  • 1
9y 
Skew, what's your opinion? Comment below:

If the losses that are being incurred are of temporary nature, you replace them with normalized income. Otherwise, I'd do an equity valuation, as an option to liquidate.

Regarding multiples, I'd use expected earnings as they provide insight into the future value of the company.

Then again, I'm still a student, so you shouldn't rely on me too much ;)

9y 
samtheman25, what's your opinion? Comment below:

When doing valuation based on trading comps, the first step is to properly identify the peer group and tier the different companies. Usually you would tier companies based on market cap so your comparing apples to apples. Once you do that, you usually want to compare values for LTM, forward 1 year and forward 2 years. That way you know how a company will fair in the future and you will also be able to evaluate the past year's performance. Once you compile P/E multiples for the peer group, do an average, median, high and low on the entire group - and those will be your different ranges of P/E multiples for the group.

For your second question, just because the company has negative cash flow in the earlier years - assuming you have the company growing in later years - the company should reach a point where it has positive cash flow. This positive cash flow will be the basis of your perpetuity growth terminal value which will comprise a large chunk of your entire firm value. In essence you can still do a DCF but it may not resemble the true value of the firm. A better way to value the firm would be to use an EBITDA multiple for the terminal value so the earlier loses wont heavily affect the terminal value. Many people in the industry would agree that a terminal value derived through an EBITDA multiple is probably a better metric to use than one derived through perpetuity growth.

Hope that helps!

  • 2
9y 
bonks, what's your opinion? Comment below:

.

Nothing short of everything will really do.
9y 
16rl, what's your opinion? Comment below:

I think these ratios are quite important to understand the overall state of the company, however these are based on the company's balance sheet, which represent a snapshot of the company's financial at a given time. Such ratios should be compared with industry averages to see if the company is over/under-performing the competition.

9y 
Gekko_KKR, what's your opinion? Comment below:
16rl:
I think these ratios are quite important to understand the overall state of the company, however these are based on the company's balance sheet, which represent a snapshot of the company's financial at a given time. Such ratios should be compared with industry averages to see if the company is over/under-performing the competition.

I understand that they're important because they offer different areas of comparison between firms in terms of asset mgmt etc, but which are more frequently used? Pardon my lack of experience.

  • 1
9y 
oreos, what's your opinion? Comment below:

2 twice a day by analysts, once every 4 hours by MDs

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
9y 
Gekko_KKR, what's your opinion? Comment below:
Oreos:
2 twice a day by analysts, once every 4 hours by MDs

Sorry, could you elaborate?

9y 
Gekko_KKR, what's your opinion? Comment below:

Would appreciate more feedback from current ibankers, thanks.

9y 
mogel, what's your opinion? Comment below:

I know P/E is distorted by leverage but can it also be distorted if there is almost no leverage at all? I was under the impression that EV/EBITDA was typically only used as a multiple for highly capital intensive companies.

9y 
Brosef Stalin17, what's your opinion? Comment below:

find public comps, download their financials using EDGAR and derive their ratios

9y 
Yeezy's Flesh, what's your opinion? Comment below:

ok, is there a way to download a full industry's financials for a spread (the way you would in factset for ratios or key metrics) at once? i'm lazy, and SEC.gov sucks. just wanted a quicker, efficient way

9y 
fryguy22, what's your opinion? Comment below:
ror858771631:

Need help analyzing multiples. Why are trading multiples (LTM) lower in the following year. Why won't they go up assuming the company is doing well and not losing market share etc.

First off, apologies if this misses the mark as I'm not entirely clear on what you're asking.

Is your question: "Why are forward multiples lower than LTM multiples?" If that's your question, the numerator (share price / equity value / EV) is staying the same, while generally speaking forward metrics are improved vs LTM metrics (a company's projected Revenue / EBITDA / EPS is higher than its LTM metric). If the reverse is true and the business is projected to decline, the forward multiples will be higher than the LTM multiples.

9y 
Bullet-Tooth Tony, what's your opinion? Comment below:
fryguy22:
ror858771631:

Need help analyzing multiples. Why are trading multiples (LTM) lower in the following year. Why won't they go up assuming the company is doing well and not losing market share etc.

First off, apologies if this misses the mark as I'm not entirely clear on what you're asking.

Is your question: "Why are forward multiples lower than LTM multiples?" If that's your question, the numerator (share price / equity value / EV) is staying the same, while generally speaking forward metrics are improved vs LTM metrics (a company's projected Revenue / EBITDA / EPS is higher than its LTM metric). If the reverse is true and the business is projected to decline, the forward multiples will be higher than the LTM multiples.

This.

9y 
golfer23, what's your opinion? Comment below:

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9y 
golfer23, what's your opinion? Comment below:

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